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Money Management

I’m very aware I have talked about this topic before as well. But I feel this is something that really needs to be talked about more than once, from different angles and then peferrably repeated every once in a while. I believe this is both neccessary to you as it is to me in order to become a successful trader.

There are certain points which you and me both should follow at all times.

Limit your losses!!! This is possibly the most important thing to remember EVER. Before entering the trade, make sure that should the deal go bad you wouldn’t lose more than you are ready to lose (for me it most likely won’t be above 10% of my capital, though possibly just couple of % per deal). And once you’ve set your limit, do not, I repeat DO NOT change your stop losses. More often than not you will only lose more this way. And if you’re still a beginning trader, then there’s NO EXCEPTIONS to this rule.

Don’t say NO to new money! If your trade has gone in the desired direction, don’t be in a hurry to exit the trade (note that I’ll discuss a bit different aproach to this idea soon - greed). Of course, we can’t just wait the price to go up only to see it goes far too down again making us take a loss instead of small profit. Rather, once we see the price has gone up and we get a signal that we should probably get out, as a first thing, instead of exiting the trade, just raise your stop loss just below the current trading area. It’s never too much to win, as long as you keep your stop losses so that you wouldn’t lose much of your already earned money. But of course, this point here is questionable and I’ll come back to it soon.

Diversify your portfolio. You shouldn’t put too much money on ANY one trade, 10% IS sufficient and in addition to bringing you enough profit it will also keep your losses at the minimum level. If you don’t follow this rule then ...even if you are capable of making good trades, by putting 25-100% of your capital to any one trade, this brings your emotions into play and like I have mentioned in my previous posts, emotions are not good in this business. This is again something that one of my next posts will disagree with.

Risks and profits. How much money are you willing to risk in order to make $1 profit? If your answer is 1:2, think again – this means that you are ready to risk $2 in order to make $1. This sounds really stupid, doesn’t it? So instead, keep this ratio something like 2:1 or 3:1 – for every dollar you risk you are expecting $2-$3 in return.

Trading in the direction of a trend is more often than not more profitable than trading against the trend in hopes that the trend will reverse. Here are exceptions of course, especially if you are knowledgable enough to actually notice trend reversal signals and are able to make use of them.

Never try to decrease your losses by making the same trade over and over again in hopes that eventually the market will go in your direction and you will hopefully end up with profit or 0 point. A losing trade is a losing trade and should not be repeated.

Losing money is good! Read this point with caution. If your loss management sucks then don’t read it at all, go on! If you have implemented a good loss management system for yourself – meaning that you never lose more than you can afford to lose or you never lose so much that you will become emotional, then losing money IS good. Losing trades teach you as much as winning trade does, possibly more. Why did you lose? Find the reason and you’re a lot smarter. And that’s only good, isn’t it? Losing Is Good! (except if about all of your trades are going bad...then, don’t try to learn anything from it, first stop for a month and read a lot of books and then start analysing what went wrong).

No emotions, just analysis! Don’t make a trade due to your gut feelings. Don’t even think about it. If you make a trade, you better have a really good reason for it (something OTHER than you just HOPE to make money...)

One day – 10 losing trades, definite NO NO! In addition to setting the amount of $$$ or % you are ready to lose a day, also set limit to the number of losing trades you can make. If that number is achieved, stop, as if you make too many losing trades in a row, you’re getting emotional again and that’s no good.

Don’t trade other’s signals. Don’t trust others. Do I need to say more? Learn about it all yourself and don’t count on buying or selling suggestions of others.